The Role of FIDIC contracts in the construction industry

Kaj Mller (M. Sc. C. E., Exec. MBA) FIDIC Executive Committee member since 2011 Liaison with FIDIC Contracts Committee Head of Export @ Sweco Group Scandinavian originated Engineering Consultant group with app 9 500 employees and with home-market business in 12 European countries and export business in 60 80 countries. Providing services in architecture, engineering and environment management as Advisors, Engineers, Designers, Works Supervisors, Panellists, Inspectors to all parties along the project time-line, from early political decisions to final decommissioning.

The Role of FIDIC contracts in the construction industry

The next 20 minutes:

- The characteristics of the engineering / construction market and the industry, from a contracts perspective;

- FIDIC contracts in its context, pre-contract efforts recommended by FIDIC

- FIDIC Contracts and Agreements

- A few cases from reality

Engineering / Construction market and industry

Panama Canal 2014 Expansion. Illustration by world property journal. Estimated CtC 7 billion USD.

- Lots of $ at stake; - Publically exposed and (sometimes) politically

questioned;

- Dependant on the unpredictable mother-earth;

- Works (too) often procured on a lowest-price bases;

- Minimal time-line between financial close and commissioning & hand-over.

Projects macro-characteristics:

Engineering / Construction market and industry

- Multi-disciplinary, technically complex projects;

- Each project is a temporary enterprise;

- Parties has most likely never worked together before;

- Globalisation generates project teams with multiple nationalities and thus different ways of operating, business culture and social, environmental and ethical compasses;

Projects micro-characteristics:

Copenhagen ring metro Project.

Programming of the project set your aim

- Unknown counterparts;

- Unpredictable project horizon;

- Innovative solutions;

- Fast progress;

- Attractive price tag; and

- Accurate end-result.

The nature of every-day business for the industry:

Programming of the project set your aim

- Interest rates

- IS/IT (engineering, design, planning, communication, coordination.)

- Recognised conditions for cooperation

However, these days, three external drivers which makes this work less troublesome

Open BIM by Scia

Programming of the project set your aim

Given all macro and micro characteristics of the project, what are the answers to all the Basic Project Considerations such as: o Location, physical constraints; o Legal constraints; o Financial constraints; o Time constraints; o Design and construction constraints; o Operational constraints; o Employers abilities; o Environmental constraints; and o Social constraints.

And thus, what Project Strategy does this generate?

Conditions for cooperation for FIDIC, it starts way earlier by accurate Programming

FIDIC Procurement Procedures Guide. 2011

Programming of the project set your aim

- How to finance? (Public, Private, PPP,) - How to structure your Works / Services

packages? - Fast track or normal speed? - Employers role and influence? - How to allocate risk? - What payment methods? - How to procure? - How to implement?

The answers to this should form a solid base for which delivery methods and contract forms to use.

Project Strategy

Choice of delivery methods type of contract

Use the appropriate Delivery Methods:

Model agreements for

professional services: Client/Consultant

Joint Venture

Sub-Consultant

Representative

Form of contract for works: Construction and Sub-

Contractor

Construction (MDB)

Plant, Design & Build

Turn Key (EPC)

Dredging

*Underground works

Form of contract for works

and operations: Design, Build & Operate

(DBO)

*Operate, Design and Build

(ODB)

Advantages with FIDIC contract & agreement forms

Essential clauses.

Detailed definitions.

Consistent structure.

Risk allocated to party best placed to

control it, bear it, and deal with it.

Drafted by consulting engineers who

design and manage projects.

Range covers most needs.

Readily adaptable to fit requirements.

Positive FIDIC image.

World-wide acceptance

CLEAR, COHERENT

FAIR, EQUITABLE

THIRD PARTY

COMPLETE, FLEXIBLE

RECOGNISED

Advantages with FIDIC contract & agreement forms

- 50 year track record by development funded projects bi- and multi-lateral, amongst others;

- Reduced risk for corruption balanced, well understood and recognised;

- International standard, efficient implementation, less risk for disputes;

- Private & public sector support;

- Extensive training options;

- Backed up by FIDIC best business practices such as Risk, Integrity, Sustainability, Capacity Building

In addition, you get

An Turn Key (EPC) delivery method is not suitable for use if:

- There is insufficient time or information for tenderers to scrutinise and check the Employer's Requirements or for them to carry out their designs, risk assessment studies and estimating;

- Construction will involve substantial work underground or work in other areas which tenderers cannot inspect;

- The Employer intends to supervise closely or control the Contractor's work, or to review most of the construction drawings; or

- The amount of each interim payments is to be determined by an official or other intermediary.

A sample-recommendation

Choice of Contract is crucial for project success

The main characteristics of this case-project were:

- Design and Construction of a mega-sized green field project over 4 years;

- First ever commercial application of the core process technology;

- Significant and crucial public permits needed, adaption to national regulation crucial;

- The project represents a crucial, hazardous risk to society if implemented incorrectly;

Yet, the project was procured an EPC delivery method with Lump Sum payment method. Claims and counter claims at app 100 % of contract price. Arbitration since 2008. Current completion forecast 7 years late and 300 % over budget.

A few discouraging examples

Choice of Contract is crucial for project success

Choice of Contract is crucial for project success

A few discouraging examples The main characteristics of this case-project were: - An 8.7 km long tunnel in unknown, but very challenging,

geological conditions. Planned time for completion, 5.5 years;

- Procured on an EPC Lump sum contract bases with very poor tests and studies of ground conditions;

- 1st EPC contractor bankrupt after 4 years due to sever progress problems and engineering difficulties. Released from the contract against an LD penalty of 60 % of the initial contract value;

- 2nd EPC contractor suspended year 6 by environmental authorities due to work-methods in breach against national env. legislations. Eventually terminated;

- 3rd contractor procured on a quantity based compensation model with new tunnel drive method.

Project completion planned for 23 years after commencement at a final cost at 1 100 % over budget.

FIDIC Contracts and Agreements for successful projects

The choice of delivery method and payment method should not only be based on market (demand/supply) conditions, but more importantly based on the characteristics of your project. Your tools for success are available at www.fidic.org

A final (personal) recommendation

http://www.fidic.org/